Before beginning negotiations, you should do your best to understand the needs of the project developer. In particular, it is important to understand that, after finalizing the PPA with you, developers must then approach debt and/or equity financiers to raise money to build the project. Therefore, it is important to avoid requesting physical PPA terms that could make the project unfinanceable. Some potentially problematic terms include:
Understand the Developer’s Needs
Debt financiers typically demand to be fully repaid during the lifetime of a project’s initial PPA, and tax equity investors, who invest in renewable energy financing, are often required to maintain their ownership for 7–10 years to fully capture the federal tax credit benefits. As a result, average PPA lengths range between 10 and 25 years. While shorter PPA terms are possible, they tend to come at a premium because the developer’s capital costs are higher.
Credit rating and collateral
Financiers and developers are used to signing 25–30 year PPAs with utilities. As new types of buyers such as corporations and cities entered the market, financiers have had to reconfigure how they evaluate the risk of signing these long-term contracts. For buyers whose credit rating is below BBB-/Baa3, developers may ask for credit support in one form or another. If this is something your city is unwilling to provide or backstop, you will want to make developers aware of this early on.
Most PPAs outline extreme conditions under which the PPA could be terminated early. However, if you request what is known as a termination for convenience clause, the clause will likely require you to pay liquidated damages or a termination fee to repay the investor for lost revenue. The amount owed to the investors varies depending on when you terminate the contract, the agreed length of the PPA, and developer calculations.
Change in law risk
Financiers are not usually willing to assume the risk that a change in law may cause economic changes to the PPA, so this risk must usually be borne by some combination of the off-taker (in the case of your city’s PPA, this means you) and the developer.
For more information on key contract terms, see the “Power Purchase Agreements: Utility-scale Projects” chapter in Stoel Rives’s Law of Solar.